Bank slashes growth forecast and warns over 'slow' recovery

The economy will not recover its pre-recession peak for another three years as
Britain faces a “period of persistently low growth” and sticky inflation,
the Bank of England warned in its most pessimistic outlook since the
financial crisis.

The Governor of the Bank of England said the squeeze on family finances would persist for longer than expectedPhoto: PA

The Bank slashed its growth forecast for 2013 and cautioned that the economy may contract again in the final three months of the year, as Governor Sir Mervyn King said the recovery would be “slow and protracted”. Its stark warning came as jobless claims rose by 10,100 to 1.58m in October, despite another fall in the official unemployment rate from 7.9pc to 7.8pc for the three months to September.

Growth next year will be 1.2pc, not the 1.8pc forecast in August, the Bank revealed in its Inflation Report. It raised its 2012 forecast from zero to 0.2pc but Sir Mervyn said “output may shrink a little this quarter”. The Bank left its 2014 forecast unchanged at 2pc.

Any hopes of a sharper rebound were dashed, though. “We have decided the chances of a rapid recovery are a good deal less than we thought,” Sir Mervyn said, citing the deteriorating global economic outlook and the prospect of weak growth in Europe even without a new crisis. The report added that “growth is more likely to be below than above its historical average rate over the entire forecast period”.

The dismal economic picture contributed to a 1.1pc fall in the FTSE 100 to 5,722, its lowest level in two months.

The Bank also warned that inflation will remain above 2pc until mid-2014, a year later than expected, extending the squeeze on household finances and delaying the recovery in consumer spending. Sir Mervyn admitted that the downgrade for 2013 was “because the squeeze on real take home pay will be a bit bigger than thought”.

“We face the rather unappealing combination of a subdued recovery with inflation remaining above target for a while,” he added. “Weak global growth ... for a country like the UK attempting to rebalance her economy ... poses real challenges. It may be unreasonable to expect anything other than a slow and protracted recovery.”

The squeeze on family finances was underlined by figures from the Office for National Statistics (ONS). Average pay, stripping out bonuses, grew by just 1.9pc year-on-year – well behind inflation at 2.7pc. Pay restraint has allowed companies to keep hiring, Scott Corfe at the Centre for Business and Economic Research said, but for individuals it has meant “living standards decline in real terms”.

The jobless total dropped by 49,000 between July and September to 2.51m, with Britain’s unemployment rate now at 7.8pc. At the same time, the number of people in work increased by 100,000 to just under 30m, the ONS said. Analysis by the Bank showed that almost half the 1m private sector jobs created since June 2010 have been part-time, and that both full and part-time staff are working half an hour more per week despite taking a real-terms pay cut.

Economists said the Bank’s forecasts hinted at the end of quantitative easing (QE) barring a new crisis. Although the Governor insisted policymakers had “not lost faith” in the programme, he conceded there were “limits to the ability of domestic policy to stimulate private sector demand” as the economy adjusts to a new model in the face of global headwinds.

The Governor also dismissed the furore over the Treasury’s decision to seize from the Bank £35bn of surplus cash generated by the QE programme as “a lot of fuss about nothing”.